China extends and enhances multiple tax incentives in the post-COVID era
Lewis Lu of KPMG China discusses the extended and enhanced tax incentives designed to stimulate China’s economy.
China's economy, despite achieving 5.5% year-on-year expansion in the first half of 2023, is showing signs of slower growth. In response to this situation, and the increasingly complex global economic environment, several key Chinese ministries recently unveiled an array of new and extended tax policies. This includes initiatives from the Ministry of Finance, the State Taxation Administration, and the National Development and Reform Commission. The policies span various sectors and themes, ranging from the capital market and small businesses to technological innovation, environmental sustainability, and individual taxpayers.
Most of the measures will remain in effect until the end of 2027 – the most noteworthy include:
Supporting the capital market
Continuation of the individual income tax (IIT) exemption for disposal gains on Hong Kong-listed stocks, where acquired through the Stock Connect mechanism by mainland Chinese individual investors. This incentive was initially introduced in 2014, repeatedly extended, and had been set to expire by the end of 2022 – it is now extended to the end of 2027;
The preferential IIT treatment for individual partners in venture capital (VC) enterprises is to be continued. Under the rules, where a VC enterprise elects to tax account for its investment returns on a fund-by-fund basis, the individual partner will be subject to the flat 20% IIT investment return rate, separately on items on fund equity disposal gains and dividend income. Alternatively, where a VC enterprise elects to tax account for its investment returns on an annual income basis, the progressive IIT rates of 5% to 35% will apply to the investors fund income collectively;
Continuation of tax reliefs for China Depository Receipts (CDRs). For instance, individual investors who transfer or hold CDRs issued by innovative enterprises receive personal income tax benefits. In addition, management companies of public securities investment funds will be temporarily exempt from VAT on the gains generated during the transfer of CDRs. It should be noted that some of the extended IIT and VAT incentives will be valid up to the end of 2025. By contrast, other incentives such as CIT exemption for gains/dividends derived by corporate investors for transferring/holding of CDRs, no expiration date is specified;
Continuation of IIT exemption for income earned by overseas individual (natural person) investors from investing in Chinese domestic futures products such as crude oil, which have been approved for foreign participation by the State Council. Furthermore, for futures products with bonded delivery operations approved by the State Council, the VAT exemption will be extended; and
In parallel, China has also halved the stamp tax duty rate for securities trading from 0.1% to 0.05%. This takes effect from August 28 2023.
Supporting small businesses
Continuing the VAT exemption for small-scale VAT taxpayers with monthly sales of less than RMB 100,000 (US $13,750), and a reduction in the applicable VAT rate for taxable sales income of (larger) small-scale VAT taxpayers, from 3% to 1%;
Small businesses, with annual profits up to RMB 3 million (US $430,000), can enjoy a 20% CIT rate on 25% of their taxable income, i.e., an effective CIT rate of 5%. The latest change expands the application of the 5% rate, which previously just applied to the first RMB 1 million of profits; and
A 50% reduction to several levies in the case of small-scale VAT taxpayers and small businesses. These include resource tax (excluding water resource tax), urban maintenance and construction tax, property tax, urban land use tax, stamp duty (excluding securities trading stamp duty), land occupation tax, educational surcharge, and local educational surcharges.
These reliefs are all extended to the end of 2027.
Supporting technological innovation and green development
A 100% immediate CIT deduction for equipment with a unit value not exceeding RMB 5 million. Domestic and foreign-funded R&D centres can also get a full VAT refund for equipment purchased within China;
An existing incentive grants a ‘bonus’ VAT input credit of 5% to service industry companies, rising to 10% for daily life services. This will be continued and added to, with a new 5% bonus input VAT credit for integrated circuit (semiconductor) enterprises and 15% for companies producing and selling industrial mainframes, key functional components, and numerical control systems. Furthermore, a new 220% R&D super deduction (compared with the standard 200% deduction) has been implemented for businesses in the latter sectors. The new incentives apply retroactively from January 1 2023;
Certain exemptions from property tax and urban land use tax will be extended. These cover national-level and provincial-level technology business incubators, university science parks, and nationally registered mass entrepreneurship and innovation spaces. Specifically, the exemptions cover cases where the former provide properties and land for use by incubating entities, either for free or through rentals. Additionally, the income generated from providing incubation services to entities within these spaces will be given a VAT exemption; and
A reduced CIT rate of 15% will continue to be applied to eligible third-party enterprises engaged in pollution control, as well as a 50% reduction in resource tax for coal obtained through backfill mining.
Relief for individuals
An itemised IIT deduction for children’s education, child raising costs and expenses of supporting elderly relatives are to be enhanced. At least an additional RMB 1,000 per month is given to each category for the IIT deduction. This retroactively applies from January 2023;
Stock incentive income and one-off annual bonuses will continue to be subject to their current preferential IIT treatment, until the end of 2027. A lower IIT rate is applied by means of a special application of the progressive IIT rate schedule;
Under the general IIT rules, multiple items of income are combined into a “comprehensive income” amount. The progressive IIT rate schedule is then applied with reference to this total amount of income (higher IIT rates applying for larger income levels). However, in the case of stock incentives, the stock incentive amount is considered separately from other items of income when referencing the progressive IIT rate schedule – as such a low IIT rate will be determined and applied to the stock incentive amount; and
In the case of a one-off annual bonus, this goes even further. Like with the stock incentives, the progressive IIT rate schedule is referenced separately from other comprehensive income items. However, in addition, the annual bonus amount is divided by 12 (i.e., to determine a deemed amount of bonus accruing for a month) before referencing the progressive IIT rate schedule, leading to the application of an even lower IIT rate.
Foreign employees can continue to benefit from tax-free incentives such as housing subsidies, language training fees, and children's education expenses until the end of 2027.
The last three incentives were previously set to expire by the end of 2023.